What on Earth Is a Circuit Breaker?!Every couple of days since April 2nd, everybody's been talking about a stock market halt all day. You're left there trying to Google it so you're not the only person in the group chat who doesn't know what's going on. But actually, nobody else in your group chat knows what's going on either. They're low-key Googling it under the desk. You don't have to know everything in the market to be a "seasoned" trader. What does get disappointing is when people guess instead of providing facts or a direct link to an article about market halts.
So, this is your quick-but-detailed-read article/ guide to market halts and circuit breakers. Send it to your friends in that group chat. Why today's dump happened in the first place? More on that later. It's a long story. 🥹
What is a circuit breaker?
It's simple: a circuit breaker is a 15 minute OR whole-day market-wide HALT when the market reaches 1 of 3 decline levels. It all depends on the level, how fast the decline is, and potentially other factors that we are not aware of. Keep in mind this is not something we have to deal with often.
When does it happen? And what stock does it track?
Good question. The halt is triggered following declines in the S&P 500 only . That is: AMEX:SPY SP:SPX $CME_MINI:ES1!.
If these level 1 & 2 are reached before 3:25 PM EDT , there is a 15 minute market-wide trading halt. Meaning you cannot enter or exit positions. If level 3 is reached at any time in the day, the entire day's trading will come to an end.
Level 1: -7.00% | 15 minute halt
Level 2: -13.00% | 15 minute halt
Level 3: -20.00% | Entire day halt
So when the S&P 500 index reaches -6.98%, be sure a halt is coming very soon at -7.00%. Sure, like today, "they" might pump it and use that as support and prevent a halt (we got very close to -6.35% on CME_MINI:ES1! if I'm not mistaken). But it's good to be vigilant and make sure you're not in any daytrades.
Does CME_MINI:NQ1! NASDAQ:QQQ CBOT_MINI:YM1! trigger the halt also?
No. The halt is only triggered by the S&P 500. The Nasdaq Composite famously moves much more than S&P 500, so a 7% drop in S&P is way more dramatic than a 7% drop in Nasdaq and it's highly likely at -7% in S&P that Nasdaq would be at -8% or -9%. Although, both are undoubtedly decimating for any long positions.
Why does this rule exist?
This was introduced after Black Monday of 1987 where the market was free falling ( DJ:DJI dropped 22.6%) with no safety stops in place to prevent a market-wide disaster. This prevents further panic selling and massive stop loss raids, and also gives institutional traders time to zoom out and see the bigger picture.
How close did we get recently?
Today we got within 0.7% of getting a 15 minute halt.
See for yourself:
And the intraday 15 minute chart:
FUN FACT: What if I shorted the top on CME_MINI:ES1! ?
Assuming your time machine goes back 24 hours (some time machines only go back 10 years minimum), you'd have booked 1500 ticks at $12.50 per tick. So around $19k per contract. You know that's not too bad. It's almost a Toyota Camry per contract. Do better! 😆
How do I trade this?
Do you really have to? Please do not FOMO & catch a falling knife. Trade light. The market is open for the rest of the year. Trade with a stop loss, and remember, if you FOMO'd and bought at -3% just because it's down 3%, you'd have gotten decimated. Use the charts not the % on your screen. 🔥
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